India bond lending scheme stalled over tax issues

According to people familiar with the situation, India’s plan to permit lending and borrowing of sovereign bonds has stalled due to uncertainty about how taxes will be applied, even though infrastructure has been in place for more than 18 months. This has complicated an attempt to deepen the country’s $1.3 trillion debt market.

India Bond Lending Scheme Stalled Over Tax Uncertainty

The people, who asked not to be named while discussing private matters, stated that no trades have been completed on a portal established by the country’s sovereign debt clearing house in July 2024 as market participants await clarification on whether lenders or bond borrowers are responsible for paying goods and services tax.

According to the persons, the matter has come up at regular meetings of the Clearing Corporation of India Ltd. and its members, who are financial organizations that deal in government bonds.

Portal Delay and GST Clarity Issues

The Reserve Bank of India made the announcement in February 2023, stating that the goal was to increase market trading liquidity and provide investors, such as insurers, who are the second-largest holders of government debt, with a way to use their substantial debt holdings.

Thin trading has increased borrowing costs and intensified yield spikes, especially in long-tenor bonds. The country’s sovereign bond trading is still significantly dominated by the benchmark 10-year paper, which typically accounts for more than half of daily transactions.

Liquidity Goals and Market Structure

According to the individuals, the main issue is whether to use a “reverse charge mechanism,” which is employed in stock lending. Borrowers, not lenders, are responsible for paying the tax under this arrangement. They claimed that discussions over whether the same clause would apply to bonds had taken place between the authorities and market players. There is still no final conclusion.

The Reserve Bank of India, which oversees the CCIL, did not respond to an email requesting comment on the issue.

Regulatory Response Pending

Frequently asked questions

1. What is India’s bond lending and borrowing plan?

In order to increase liquidity and trading activity in the government debt market, it provides a framework for market players to lend and borrow sovereign bonds.

2. Why is the bond lending scheme now stalled?

The ambiguity surrounding the application of goods and services tax (GST) on bond lending and borrowing transactions has caused the plan to stall.

3. What is the primary tax topic at hand?

The use of the reverse charge system, which would require borrowers to pay the GST rather than lenders, is a topic of debate among authorities and market players.

4. What was the debut date of the bond lending platform?

The gateway was established by the sovereign debt clearing house in July 2024, but because of problems with tax clarity, no transactions have been completed as of yet.

5. What makes bond financing crucial to the debt market in India?

It may minimize total government borrowing costs, lessen yield spikes, and increase liquidity, particularly in long-tenor bonds.

Conclusion

India’s $1.3 trillion sovereign debt market may be considerably deepened and stabilized by the country’s bond lending and borrowing framework.

Despite having adequate infrastructure, the system has remained dormant because of unresolved GST treatment, especially with regard to who is responsible for paying the tax. The primary catalyst for platform activation and increased market liquidity will be authorities’ clear tax rules.

Disclaimer

Disclaimer: This information is for general awareness only and is based on reported sources. Policy, tax rules, and regulatory decisions may change. Please verify with official authorities before making financial or investment decisions.